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S&P/TSX +23.80 (12,577.28)
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U.S. GDP Growth - StockResearchPortal.com
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January 29, 2010
Good Morning:
U.S. GDP Growth
An article published before the U.S. Q4 2009 GDP numbers were released at
8:30 this morning titled 'GDP could be the best in nearly four years'
says "U.S. economic growth probably increased at the fastest pace in nearly four
years over the final three months of 2009, but it's not yet time to break out the
champagne".
Economists are reported as forecasting 5.4% annualized (seasonally adjusted) GDP
growth (actual as subsequently released 5.7%) as
contrasted with an annualized Q3 2009 gain of 2.2%. That said, the article
reports one Goldman Sachs economist as attributing Q4 GDP growth to "massive swing
in inventories" - most of the Q4 2009 growth is reported as coming from unsold goods
inventory adjustments - and "enormous levels of government stimulus". In Q4
2008, the economy coincidently dropped at a 5.4% annual rate.
The article also:
· says the real issue is what happens to in 2010 when few economists
expect much acceleration in consumer spending, given the U.S. jobs market;
· reports 'good news' in that shipments of core business capital
equipment goods jumped to a 18.7% annual rate in Q4 2009. , the fastest
growth since 2000 - this in circumstances where U.S. business capital stock declined
after 2007 and the existing stock of production equipment is aging; and,
· says most economists are forecasting annualized growth rates
of about 3% for the next several quarters, which would be enough growth to stabilize
the economy, but not strong enough to replace the U.S. jobs lost after 2007.
My comments:
· first, I have said in several e-mails that one ought not to
be taken in by application of % increases. On their face, a 5.4 % annual decrease
and a 5.4% annual increase could easily be read as offsets. If you do the
math you will find that if you decrease 100 by 5.4%, and then increase the result
by 5.4% you derive a result of 99.7, not 100;
· second, and importantly, U.S. GDP is reported as a nominal (inflation
included) statistic. For the 12 months ended December, 2009 the U.S. CPI Index
was reported as 2.7%, thus an annualized U.S. GDP of 5.7% would imput annualized
'real growth' of 3.0% in the U.S. economy in Q4 2009. What with continued
U.S. job losses, etc., that is a result intuitively I seriously doubt;
· third, equity values are driven on prospective after-tax free
cash flow generation. To the extent that the capital equipment being used
by U.S. businesses is aging and becoming technologically obsolete, I don't think
one can simply look at the U.S. equipment goods growth rate and say - "wow".
It may have been (as stated in the referenced article) that a substantive part of
those equipment acquisitions in Q4 2009 were purchased out of necessity and were
not discretionary purchases. Without knowing the split between 'sustaining
capital purchases' (which reduce 'free cash flow') and 'growth capital purchases'
(which enhance 'free cash flow') I consider the Q4 2009 'core business capital goods'
growth number to be comparatively meaningless as an indicator of economic growth
or prospective economic growth;
· fourth, forecasts suggest annualized U.S. GDP of 3.0% for 2010, meaning
that if U.S. CPI again is 2.7% in 2010, the 'real growth' rate in the U.S. economy
will be 0.3% - not much of a recovery - a result that would be unlikely to create
any meaningful U.S. 2010 job creation; and,
· the DJIA is up 63 points this morning as I complete this e-mail
- presumably in part because of the 'favourable GDP' report that exceeded economist
consensus estimates. I continue not to understand the generally positive momentum
in the U.S. equity markets in the face of what I see as a U.S. economic 'muddle'.
Notes to Readers
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way to be interpreted as an endorsement of one or more of the companies mentioned
herein, a suggestion as to the future direction of the stock price of one or more
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The owners of Stock Research DD Inc. (the owner of StockResearchPortal.com and StockResearchPortalBlog.com)
or their families, entities in which they have ownership interests, and officers,
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or investment recommendation with respect to those companies or their securities.
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